Part 8: Apparel
The following is part eight of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4, part 5, part 6 and part 7). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's apparel industry.
CMR interviews with leading Chinese clothing companies found that all large industry leaders have either started moving overseas or plan to begin the move within the next five years. Smaller industry leaders are also moving abroad – 40% have already established an overseas presence.
In order to fully take advantage of overseas growth opportunities, respondent companies are focusing now on building brand awareness and a profitable brand image worldwide; five out of seven respondents with plans to move abroad consider brand building their number one priority in the process. Respondents are willing to forego short term revenue growth in order to gain overseas brand awareness.
Respondents are also moving overseas to escape fierce domestic competition, and capitalize on demand for their products in overseas markets. The apparel market is growing quickly in China with retail sales growing around 20% in 2008. While we expect sales will drop due to the financial crisis, the apparel sector remains relatively robust. Brands like Zara, H&M (HMRZF.PK) , C&A, and Uniqlo are capturing considerable market share while luxury brands like Zegna and Louis Vuitton still expect positive growth in 2009.
All respondents that have already started moving overseas have established presence in North American markets, mainly the United States. 80% have operations in Europe, and 80% have operations in emerging markets.
In addition to the sheer size of the markets, Chinese textile companies are targeting Europe and America to add prestige to their brands and prove to consumers worldwide that their products are of top quality and style. As one respondent explained, "if you want to be successful, you cannot miss out on the European and American markets. For one, the markets are huge, but also being able to sell in the US and Europe is good for brand image."
Nearly all respondents are also targeting emerging markets, hoping to tap into rapidly growing demand for good quality products at slightly lower prices. Most respondents believe that the "Made in China" label will not hurt their chances for moving abroad as most foeign brands, even high-end ones, manufacture all or part of their apparel in China.
The vast majority of respondent companies started their expansion overseas via OEM exports, as a way to not only tap into overseas demand but to learn about market characteristics and gain experience operating in a new business environment. Respondents have gradually been switching to export of their own branded products, as well as establishing joint ventures with international organizations and corporations to ensure a more sustainable overseas growth path.
All respondents consider American and European markets their highest priority target markets for the next five years, for reasons described above. Roughly half of respondents are also prioritizing emerging markets for their rapid economic growth, such as Russia, Vietnam, and South Korea.
The majority of respondents intend to continue pursuing an export-focused plan for growth abroad. Half of respondents are also choosing partnership as a means of expansion, either through establishment of joint venture companies or less formal cooperation. One respondent, for example, is collaborating with Italian and German designers in order to better cater its products to the taste of the local target market. A minority of respondents are actively pursing M&A as a means of gaining market access and further insight into local tastes and effective marketing strategies. Li-Ning (02331) has chosen to raise brand awareness overseas and compete against Nike (NKE) and Reebok (RBK) through sponsorship of NBA athletes Shaquille O'Neal, Damon Jones, and Chuck Hayes. Company founder and Olympic gold medalist Li Ning also drew significant attention to the company when he lit the torch during the opening ceremony of the 2008 Beijing Olympics.
A majority of respondents consider overcoming cultural differences one of the largest challenges they face in moving abroad, since taste in style and fashion vary greatly between markets. Thus companies that tout the "Chinese" appearance of their products as a selling point at home may have a harder time selling abroad in markets with different style preferences.
Over half of respondents consider finding employees with the appropriate skill set a big problem in expanding overseas. Many respondents are looking abroad to hire employees with knowledge of local taste in products and fashion trends, experience in innovation and design, as well as the managerial skills needed to lead company development.
Over half of respondents going abroad also consider getting past international regulations and laws to be a significant challenge. Quotas and other import restrictions, for example, seriously limit the amount of goods respondents can sell in many of their target markets. The fear of trade protectionism is rising with the financial crisis as local constituents push Governments to preserves jobs and implement quotas.
Respondents also mentioned other important challenges including learning how to operate in a new business environment and setting up the appropriate organization structure to ensure smooth coordination between home and overseas offices, rising wages and raw materials costs, and appreciation of the RMB.
Still, respondents are optimistic in their abilities to overcome these challenges going forward. Those that have already gone abroad or plan to begin the move within the next five years consider overseas expansion very important to their companies' development, and are willing to sacrifice where need be in order to realize their goals. To be successful, companies will need to determine the right brand image and marketing communication strategy and cater the designs for local tastes.
The next several sections of this report will be published on Seeking Alpha by product category. For more information about this report and accompanying charts and graphs, please contact CMR directly at www.cmrconsulting.com....
CMR Senior Analyst Ben Cavender, Analysts Natalie Zhu, Meredith Sun, and Charlotte MacAusland, and Summer Intern Christie Sze Contributed to this report.